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Stock-picking days numbered for advisers

Stock-picking is still popular among some New Zealand financial advisers but the practice is likely to become less common in future, a local fund manager says.

Thursday, November 21st 2013, 6:27AM 6 Comments

by Niko Kloeten

Mint Asset Management chief executive Rebecca Thomas says she has been surprised how many New Zealand advisers still pick individual securities, including shares and debt securities, for their client portfolios.

“You still find people going, ‘I don’t use managed funds’.  Some investment advisers still have a strong propensity to pick stocks,” she says.

“The main thing you ought to be doing as an adviser is financial planning not picking stocks.”

And Thomas says one of the reasons for advisers picking stocks may be New Zealand’s relatively uncomplicated tax regime.

“The complexity that a local tax regime adds gives an opportunity for advisers to add value.  New Zealand doesn’t have some of those tax nuances, and absent that I think some advisers fall back to ‘how do I demonstrate my value?

“That’s where they make their professional mana from; that’s what they see as their value.”

But Thomas says the number of advisers using individual stocks in client portfolios is likely to decline.

“As compliance regimes become more mature people focus on which part of the value chain adds most value,” she says.

“The focus for advisers is on spending time with their clients as opposed to researching individual securities.  They know they can’t fulfil their obligations to clients if they don’t pay attention to other areas.”

Thomas says another catalyst for some advisers abandoning stock picking will be the extra compliance required.

“It may come through a scenario where advisers see it as a negative that they have to spend so much time on compliance and pushing paper that they don’t have time to do other stuff.  They’re already struggling to cope with the compliance burden as it is now.

“No one’s going to tell you you can’t pick individual securities for your clients, but you’ve got to show you have done due diligence and have reasonable competence and research capacity to do that job properly.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 21 November 2013 at 9:13 am Brent Sheather said:
Good point but “talking your book” is the obvious thing that springs to mind. The bottom line is of course fees and what RT is effectively saying here is that advisers should be sharing more of the annual fees with a fund manager. I see lots of recommendations from private banks with ridiculous and dangerous stock picking strategies and the reason they do this is to firstly allude to some ability to add value and secondly keep annual fees down.

Last but not least you could argue that with the popularity of index funds stock picking is becoming as undesirable for fund managers as it is for advisers. LOL.
On 21 November 2013 at 12:46 pm Craig said:
Why would you put clients into NZ share funds when it is just as easy to pick the stocks for your clients? Using a wrap platform makes it easy to manage client's on this basis.
On 21 November 2013 at 1:49 pm Ally said:
There is a good argument for advisors to buy NZ fixed issues directly (rather than use funds) especially if the intention is to hold to maturity. There are dozens of issues available; many with credit ratings the advisor can use as "research". And with yields only around 5% these days, there is hardly much justification for paying a fund manager 1% to buy and hold them for you.
On 21 November 2013 at 3:40 pm Brent Sheather said:
The other issue here is that the article hasn’t disclosed that RT is on the Board of the FMA so are these her views or do they represent the views of the FMA? In addition RT is on the Board of the FMA and RT is a fund manager regulated by the FMA. It’s a funny old world in NZ.
On 21 November 2013 at 4:34 pm graemetee said:
That's a good point Ally. its a pity more advisers didn't think of that when they recommended half a dozen finance company debentures to their clients that paid a 2% commission. Craig, a wrap platform might make it easy to just pick stocks but the trick is to pick the right stocks. Given that the professional managers don't always pick the right stocks and trade like crazy on small share price movements retail investors and advisers alike should not go there. Wrap platform costs and transaction costs would prevent that being a sensible strategy. But from what I have seen of the compliance regime the FMA are more interested in ensuring that advisers' paperwork is in order and that it says they can deal in a particular security rather than whether the securities they use are the best products for the job. JT is certainly "talking her book" because the compliance regime if properly adhered to will not stop direct investment and common sense should also determine this while annual fees stay ridiculously high.
On 21 November 2013 at 8:58 pm Bryan said:
Brent. Agree about index funds. With the huge range of exchange traded funds, advisers can pick and choose the ones that will outperform. This way clients get active selections without having to pay active fund managers fees.

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